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Aldo, Inc. is trying to decide whether to lease or buy some new equipment. The equipment costs $59,000, has a 3-year life, and belongs in a 25 percent CCA class. The equipment will be worthless after the 3 years and will have to be replaced. The company has a tax rate of 34 percent and a cost of borrowed funds of 10 percent. The equipment can be leased for $22,000 a year. What is the amount of the annual depreciation tax shield in the first year?
A) $2,259
B) $2,508
C) $3,333
D) $4,517
E) $5,015
CCA Class
Refers to categories in the Capital Cost Allowance system where assets are grouped according to their nature and function for tax depreciation purposes in Canada.
Annual Depreciation Tax Shield
This represents the tax savings a company achieves due to depreciation expense, calculated as the depreciation times the tax rate.
Tax Rate
The percentage at which an individual or corporation is taxed, which can vary based on income level, jurisdiction, and type of tax.
- Ascertain the current value of depreciation tax shields and their influence on fiscal choices.
- Understand how depreciation affects financial decision-making, focusing on straight-line depreciation and Capital Cost Allowance.
- Examine the influence of corporate tax rates on decisions related to leasing versus purchasing.
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Learning Objectives
- Ascertain the current value of depreciation tax shields and their influence on fiscal choices.
- Understand how depreciation affects financial decision-making, focusing on straight-line depreciation and Capital Cost Allowance.
- Examine the influence of corporate tax rates on decisions related to leasing versus purchasing.
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